As a Rent to Own maven, have you found yourself asking this question: “If I made such a huge profit, then where’s all the money?” How to answer this question is what measuring cash flow is all about.

The definition of “cash flow” is the difference between the cash in and cash out of a business during an accounting period. Stated differently, it is the amount of cash remaining after cash is received and disbursed.

Anyone who has been in business be it large or small, for any length of time, knows that “cash” is the lifeblood of the organization. With it you succeed, without it you fail. Keeping track of where cash comes from, and where it goes, is so important that in the U.S. the Financial Accounting Standards Board (FASB) requires that a Statement of Cash Flows be prepared along with the Balance Sheet and Statement of Income and Expense for your books to be in compliance with General Accepted Accounting Principles (GAAP).

So what exactly is a Statement of Cash Flows? It is a report that shows where the cash came from (sources) and where the cash went (uses). A cash flow statement shows the inflows and outflows of cash in three classifications: 1) Operating activities; 2) Financing activities; and, 3) Investing activities. For example:

In a nutshell, all one has to do is figure out the net cash flow from each of the activities, add them together to arrive at a summary of the three activities, then add or subtract that number, depending on whether it is a positive or negative number, to Cash at the beginning of the accounting period (month, year, etc.). The resulting amount should match the ending cash balances found on your Balance Sheet for the period. To illustrate:

This is known as the Direct Method cash flow statement. This approach is fairly straight-forward except that you have to make sure to properly categorize the cash inflow and outflow accounts according to the three activities. You may want to check to see if your accounting software program will generate a Statement of Cash Flows automatically, many do.

Learning how to prepare a Statement of Cash Flows can be a challenge, yet, once learned, will solve the mystery of where your money went.

My next article will discuss the use of the bank reconciliation: Your most important navigational tool for keeping track of cash.